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EXCEL - IDEA: XBRL DOCUMENT - ECO Building Products, Inc.Financial_Report.xls
EX-31.1 - ECO BUILDING PRODUCTS 10Q, CERTIFICATION 302 - ECO Building Products, Inc.ecobuildingexh31_1.htm
EX-32.1 - ECO BUILDING PRODUCTS 10Q, CERTIFICATION 906 - ECO Building Products, Inc.ecobuildingexh32_1.htm
EX-21.1 - ECO BUILDING PRODUCTS 10Q, LIST OF SUBSIDIARIES - ECO Building Products, Inc.ecobuildingexh21_1.htm



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
 
(Mark One)
x
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2011

o
TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
 
For the transition period from _____________ to _____________
 
Commission file number:000-53875
 
Eco Building Products, Inc.
(Exact name of small business issuer as specified in its charter)
 
Colorado
20-8677788
(State or other jurisdiction of incorporation or organization)
(IRS Employer Identification No.)
 
909 West Vista Way
Vista, California 92083
(Address of principal executive offices)
 
(909) 519-5470
(Registrants telephone number, including area code)
 
____________________________________________________________
(Former name, former address and former fiscal year, if changed since last report)
 
 
Indicate by check mark whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes o No
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes  o No
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company; as defined within Rule 12b-2 of the Exchange Act.
 
o Large accelerated filer          o Accelerated filer          o Non-accelerated filer          x Smaller reporting company
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).   o Yes  x No
 
The number of shares outstanding of each of the issuer's classes of common equity as of September 30, 2011:    178, 286,100 shares of common stock



 
 
Eco Building Products, Inc.
 
Contents
 
   
Page
   
Number
     
3
     
3
 
 
 
 
     
 
 
 
 
 
     
 
     
18
 
 
 
     
     
22
     
     
     
     
     
     
     
24



 
 
PART I - FINANCIAL INFORMATION
 
Item 1 - Unaudited Condensed Consolidated Financial Statements
 
ECO BUILDING PRODUCTS, INC.
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(Unaudited)
 
             
   
September 30,
   
June 30,
 
   
2011
   
2011
 
             
ASSETS
           
CURRENT ASSETS
           
Cash
  $ 31,352     $ 81,648  
Accounts receivable, net of allowance for doubtful accounts of $0 at
         
 September 30, 2011 and June 30, 2011
    467,949       369,840  
Inventories
    1,991,122       1,542,378  
Prepaid loan facility fee - related party, current portion
    1,008,383       -  
Prepaid expenses
    65,355       85,967  
Deposits
    7,000       -  
Total current assets
    3,571,161       2,079,833  
                 
PROPERTY AND EQUIPMENT, net
    756,426       743,523  
                 
OTHER ASSETS
               
Accounts receivable - long-term portion
    57,976       81,648  
Other assets
    25,000       -  
Prepaid loan facility fee - related party
    1,835,148       -  
Equipment deposits - related party
    200,411       188,447  
Total other assets
    2,118,535       270,095  
                 
 TOTAL ASSETS
  $ 6,446,122     $ 3,093,451  
                 
                 
 LIABILITIES AND STOCKHOLDERS' EQUITY
               
CURRENT LIABILITIES
               
Accounts payable
  $ 516,724     $ 440,471  
Payroll and taxes payable
    800,489       728,751  
Advances from related party
    -       63,163  
Other payables and accrued expenses
    29,922       58,484  
Deferred revenue
    10,500       20,500  
Current maturities of notes payable
    8,968       -  
Notes payable - related party, including accrued interest
    -       1,029,111  
Loans payable - related party, including accrued interest
    -       174,217  
Loans payable - other
    44,500       44,500  
Total current liabilities
    1,411,103       2,559,197  
                 
LONG TERM LIABILITIES
               
Line of credit payable - related party, including accrued interest
    3,032,548       -  
Notes payable, less current maturities
    18,128       -  
Total long term liabilities
    3,050,676       -  
                 
TOTAL LIABILITIES
    4,461,779       2,559,197  
                 
STOCKHOLDERS' EQUITY
               
Common stock, $0.001 par value, 500,000,000 shares authorized,
         
178,286,100 shares issued and outstanding at September 30, 2011
 
and June 30, 2011
    178,286       178,286  
Additional paid-in capital
    13,661,473       10,622,135  
Accumulated deficit
    (11,855,416 )     (10,266,167 )
Total stockholders' equity
    1,984,343       534,254  
 
               
 TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
  $ 6,446,122     $ 3,093,451  
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
ECO BUILDING PRODUCTS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 
(Unaudited)
 
             
   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
             
REVENUE
  $ 690,679     $ 357,117  
                 
COST OF SALES
    623,604       326,917  
                 
GROSS PROFIT
    67,075       30,200  
                 
OPERATING EXPENSES
               
Research and development
    18,621       9,771  
Marketing
    29,953       1,980  
Compensation and related expenses
    606,454       153,585  
Rent - facilities
    78,955       142,456  
Professional fees
    293,190       146,724  
Consulting
    78,556       29,701  
Other general and administrative expenses
    333,795       85,628  
                 
Total operating expenses
    1,439,524       569,845  
                 
LOSS FROM OPERATIONS
    (1,372,449 )     (539,645 )
                 
OTHER INCOME (EXPENSE)
               
Interest income
    3,365       -  
Interest expense
    (220,165 )     (740,325 )
Gain (loss) on settlement of debt
    -       12,546  
Loss on modification of debt
    -       (377,084 )
Change in fair value of derivative liability
    -       793,694  
                 
Total other income (expense)
    (216,800 )     (311,169 )
                 
LOSS BEFORE PROVISION FOR INCOME TAXES
    (1,589,249 )     (850,814 )
                 
PROVISION FOR INCOME TAXES
    -       -  
                 
NET LOSS
  $ (1,589,249 )   $ (850,814 )
                 
NET LOSS PER COMMON SHARE - BASIC AND DILUTED
    (0.01 )     (0.01 )
                 
WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING
    178,286,100       76,288,335  
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
ECO BUILDING PRODUCTS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
   
Three Months
   
Three Months
 
   
Ended
   
Ended
 
   
September 30,
   
September 30,
 
   
2011
   
2010
 
             
CASH FLOWS FROM OPERATING ACTIVITIES:
           
 Net loss
  $ (1,589,249 )   $ (850,814 )
Adjustment to reconcile net loss to net cash
               
used in operating activities:
               
Interest on amortization of loan fees
    181,617       60,077  
Interest on repricing of warrants
    -       140,981  
Stock based compensation
    14,190       -  
Depreciation expense
    43,666       18,198  
Change in fair value of derivative liability
    -       (793,694 )
Common stock issued for services
    -       70,767  
Common stock issued for payment of rent and lease settlement
    -       80,000  
Loss on modification of debt
    -       377,084  
(Gain) loss on settlement of debt
    -       (12,546 )
Interest on amortization of debt discount
    -       474,174  
Changes in operating assets and liabilities:
               
Accounts receivable
    (74,437 )     (17,384 )
Other receivables
    -       4,686  
Inventories
    (448,743 )     (13,282 )
Prepaid expenses
    13,611       -  
Deposits
    -       45,155  
Accounts payable
    76,253       56,905  
Payroll and taxes payable
    71,738       -  
Other payables and accrued expenses
    (28,562 )     89,381  
Deferred revenue
    (10,000 )     -  
Accrued interest added to principal
    38,548       65,093  
Net cash used in operating activities
    (1,711,368 )     (205,219 )
                 
CASH FLOWS FROM INVESTING ACTIVITIES:
               
Purchases of property and equipment
    (29,473 )     -  
Purchase of software license
    (25,000 )     -  
Payments for equipment deposits - related party
    (11,964 )     -  
Proceeds from repayment of loans receivable - related party
    -       85,974  
Payments for loans receivable - related party
    -       (73,100 )
Net cash provided by (used in) investing activities
    (66,437 )     12,874  
                 
CASH FLOWS FROM FINANCING ACTIVITIES:
               
Proceeds from related party line of credit advances
    3,000,000       -  
Proceeds from other related party advances
    -       139,000  
Repayments of debt issuances
    -       (316,827 )
Repayments of related party advances and notes
    (1,272,491 )     -  
Net cash provided by (used in) financing activities
    1,727,509       (177,827 )
                 
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (50,296 )     (370,172 )
                 
CASH AND CASH EQUIVALENTS - beginning of period
    81,648       385,534  
                 
CASH AND CASH EQUIVALENTS - end of period
  $ 31,352     $ 15,362  

 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements
 
 
 
ECO BUILDING PRODUCTS, INC.
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(Unaudited)
 
             
   
Three
   
Three
 
   
Months
   
Months
 
   
Ended
   
Ended
 
   
September 30,
 
September 30,
 
   
2011
   
2010
 
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
           
INFORMATION:
           
Interest paid
  $ -     $ 56,969  
                 
Income taxes paid
  $ -     $ -  
 
 
 NONCASH INVESTING AND FINANCING ACTIVITIES
       
                 
 
Three Months Ended September 30, 2011
       
                 
 
On February 14, 2011, the Company entered into a revolving line of credit and warrant purchase agreement with MRL. This agreement
 
did not go into effect until it is ratified by the shareholders of MRL, on July 26, 2011.  Pursuant to the terms of this agreement, MRL
 
extended a $5,000,000 revolving loan facility in advances of $500,000, each, from time to time. On July 26, 2011, the Company drew
 
down $3,000,000 on the revolving line of credit.  In consideration of the revolving line of credit and warrant purchase agreement, the
 
Company issued MRL 5-year warrants for 50,000,000 common shares at an exercise price of $0.10 per share.  The warrants were
 
valued at $3,025,148 on July 26, 2011 and expire on July 26, 2016. The valuation of these warrants was determined using a
 
multi-nominal lattice model using an exercise period of 5 years and projected volatility of 163%.  The following assumptions
 
were incorporated into the model:  (a) Due to the large number of warrants issued in the money, the dilutive impact of the transaction
 
was modeled; (b) MRL would exercise the warrants as they become exercisable based on volume limitations. Volume limitations
 
were based on 100% of the last 12 months average volume, increasing 1% monthly;  (c) MRL would exercise the warrant at maturity
 
if the stock price was above 10 times the exercise price; and (d) Registration of the underlying shares would be effective 180 days
 
following their issuance. The Company has recorded the $3,025,148 value as a prepaid loan fee and is amortizing the value of the
 
warrants to interest expense over the 3 year availability period of the revolving line of credit.  A total of $181,617 of interest expense
 
was recognized for the amortization of these warrants during the three months ended September 30, 2011.
                 
 
In September 2011, the Company purchased a vehicle for $32,095 via an installment sale with an auto dealership.  Pursuant to the
 
installment sale agreement, the Company made a down payment of $5,000 and financed the remaining $27,095 over a five year period
 
at an interest rate of 9.99%.
       
                 
                 
 
Three Months Ended September 30, 2010
       
                 
 
During the three months ended September 30, 2010, the Company was a party to an agreement whereby certain increments of a
 
$127,000 convertible note payable were assigned by the original investor to a third party.  The assignment agreement included modifications
 
to the debt increments and embedded conversion features that were more favorable to the borrower, resulting in a $117,151 loss on debt
 
modification that was charged to operations.  During the current three month period, a total of $102,453 of debt increments were
 
assigned to this third party and converted into 1,627,038 shares of the Company's common stock at prices ranging from $0.12
 
to $0.17 per share (See Note 6).
       
                 
 
During the three months ended September 30, 2010, the Company was a party to an agreement whereby a $360,000 convertible note
 
was assigned in full to the same third party as the note increments described above.  The assignment agreement included modifications
 
to the debt and its embedded conversion feature that were more favorable to the borrower, resulting in a $259,933 loss on debt
 
modification that was charged to operations.  Pursuant to this debt modification, the Company recognized a derivative liability with an initial
 
value of $247,364 due to a change in the exercise price of the embedded conversion feature from fixed to variable (See Note 6).
                 
 
During the three months ended September 30, 2010, the Company issued 400,000 common shares as additional consideration for the
 
cancellation of the Company's lease on its Texas facilities.  These shares were valued at $80,000.
                 
 
During the three months ended September 30, 2010, the Company issued 190,000 shares of its common stock for consulting and advisory
 
services valued at $35,680, of which $10,000 was prepaid and recorded as a corresponding reduction of stockholders' equity.
 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 ECO BUILDING PRODUCTS, INC.
 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 
  (Unaudited)
 
           
           
NONCASH INVESTING AND FINANCING ACTIVITIES (Continued)
 
           
 
During three months ended September 30, 2010, the Company issued 236,106 shares of its common stock for legal services valued
 
at $45,222.
 
           
 
During three months ended September 30, 2010, the Company issued 122,024 shares of its common stock in exchange for the cancellation
 
of debt due professionals and consultants. The Company valued the shares at $26,164 and recognized a net gain on the cancellation of
 
indebtedness of $12,546.
 
           
 
At September 30, 2010, the Company had recognized derivative and warrant liabilities with a fair value totaling $1,109,888.  These
 
liabilities are the result of a variable exercise price on its $360,000 convertible note payable (see above) and committed and outstanding
 
common shares in excess of the number of shares authorized (See Notes 8 and 9).
 
           
 
During the three months ended September 30, 2010, the Company agreed to reduce the exercise price of 3,750,000 of its warrants from $0.40
 
per share to $0.20 per share.  A total of $140,981 was charged to interest expense for the re-pricing of these warrants (See Note 10).
 
 
 
 
 
 
 
 
 
 
 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
 
1. Organization and Basis of Presentation

Organization
Eco Building Products, Inc. (the “Company”) was incorporated in the state of Colorado under the name N8 Concepts, Inc. on March 27, 2007.

On October 19, 2009, the Company merged with Ecoblu Products, Inc., a Nevada Corporation (“ECOBLU”). ECOBLU was organized May 20, 2009 in Nevada as a wholesale distributor and manufacturer of proprietary wood products coated with an eco-friendly chemistry that is designed to protect against mold, rot, decay, termites and fire. The Company has also developed an affiliate coating program that allows lumber companies to coat commodity lumber at their facilities contingent upon their stocking the Company’s inventory and supporting the Company’s products.

On April 8, 2011, the Company formed Red Shield Lumber, Inc. (“Red Shield”) in British Columbia, Canada. Red Shield was formed for the purpose of opening a plant in Canada utilizing the Company’s red coating process for sale and distribution.  As of September 30, 2011, the wholly owned subsidiary has had little operating activity.

On May 31, 2011, the Company formed E Build & Truss, Inc. (E Build) in the State of California. E Build was formed for the purpose of operating the Company’s Truss manufacturing activities. This wholly-owned subsidiary commenced operations during the three months ended September 30, 2011.

Going Concern
The Company's financial statements are prepared using the accrual method of accounting in accordance with accounting principles generally accepted in the United States of America and have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. To date the Company has generated minimal operating revenues, losses from operations, significant cash used in operating activities, and is dependent upon its ability to obtain future financing and successful operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern. These financial statements do not include any adjustments relating to the recoverability and classification of recorded assets or liabilities that might be necessary should the Company be unable to continue as a going concern.

In 2011, the Company entered into an investment agreement and a revolving line of credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under the investment agreement, the Company received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Effective July 26, 2011, the Company obtained the ability to borrow up to an additional $5,000,000 on the revolving credit and warrant purchase agreement, in exchange for the issuance of warrants to purchase 50,000,000 shares of the Company’s common stock at $0.10 per share to MRL as a loan facility fee (see Notes 4, 6 and 9).  Of this amount $3,000,000 was borrowed in July 2011. As of September 30, 2011, the Company had cash on hand of $31,352 and $2,000,000 of capital available to them under the MRL line of credit, of which $1,500,000 was borrowed subsequent to September 30, 2011 (see Note 11).  As of the date of this filing we had cash on hand of $178,422. We expect the current cash on hand plus the remaining $500,000 available to us under the line of credit to fund operations until February 2012.
 
If current and projected revenue growth does not meet management estimates and proceeds received from MRL are insufficient, management may choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, the Company does not have any commitments or assurances for additional capital, other than MRL, nor can the Company provide assurance that such financing will be available to it on favorable terms, or at all. If, after utilizing the existing sources of capital available to the Company, further capital needs are identified and the Company is not successful in obtaining the financing, it may be forced to curtail its existing or planned future operations.
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
 
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting only of normal recurring adjustments) which, in the opinion of management, are necessary to present fairly the financial position of the Company as of September 30, 2011, and the results of its operations and cash flows for the three months ended September 30, 2011 and 2010. Certain information and footnote disclosures normally included in financial statements have been condensed or omitted pursuant to rules and regulations of the U.S. Securities and Exchange Commission (the “Commission”). The Company believes that the disclosures in the unaudited condensed consolidated financial statements are adequate to make the information presented not misleading. The operating results of the Company on a quarterly basis may not be indicative of operating results for the full year. For further information, refer to the financial statements and notes included in the Company’s Form 10-K for the year ended June 30, 2011.


2. Summary of Significant Accounting Policies

Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Eco Building Products, Inc. and its wholly owned subsidiaries, Ecoblu Products, Inc. of Nevada, E Build & Truss, Inc. and Red Shield Lumber, Inc. Intercompany transactions and balances have been eliminated in consolidation.

Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affects the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Accounts Receivable
Accounts receivable are reported at the customers’ outstanding balances less any allowance for doubtful accounts. Interest is not accrued on overdue accounts receivable.  All of the Company’s receivables are pledged as collateral for borrowings on the Company’s $5,000,000 revolving line of credit (see Note 6).
 
The Company discounts sales with extended terms where no interest is charged to their respective present value pursuant to ASC Topic 310-10-30-3 “Receivables.”
 
Lines of Credit with Detachable Warrants
Warrants issued to obtain a line of credit are recorded at fair value at contract inception.  When warrants are issued to obtain a line of credit rather than in connection with the issuance, the warrants are accounted for as equity, at the measurement date in accordance with ASC 505-50-25 “Equity-Based Payments to Non-Employees”. The issuance of these warrants is equivalent to the payment of a loan commitment or access fee, and, therefore, the offset is recorded akin to debt issuance costs. The deferred fee is amortized on a straight-line basis over the stated term of the line of credit.

Issuances Involving Non-Cash Consideration
All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services. The non-cash consideration received pertains to debt placement fees, consulting and advisory services, debt cancellation, rent, and related party equipment purchases.
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
 
Stock-Based Compensation
The Company accounts for stock options issued to employees and consultants under ASC 718 “Share-Based Payment”. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite vesting period.

The Company accounts for stock-based compensation to non-employees under ACS Topic 505-50 “Equity-Based Payments to Non-Employees.” This standard defines a fair value based method of accounting for stock-based compensation. In accordance with ACS Topic 505-50, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using a multi-nominal lattice model or the Black-Scholes option-pricing model, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.

Loss Per Share
The Company reports earnings (loss) per share in accordance with ASC Topic 260-10, "Earnings per Share." Basic earnings (loss) per share is computed by dividing income (loss) available to common shareholders by the weighted average number of common shares available. Diluted earnings (loss) per share is computed similar to basic earnings (loss) per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted earnings (loss) per share has not been presented since the effect of the assumed conversion of warrants and debt to purchase common shares would have an anti-dilutive effect. Potential common shares at September 30, 2011 that have been excluded from the computation of diluted net loss per share included warrants exercisable into 50,250,000 shares of common stock and options exercisable into 1,200,000 shares of common stock. Potential common shares at September 30, 2010 that have been excluded from the computation of diluted net loss per share included convertible debt of $1,630,309 convertible into 8,417,257 shares of common stock and warrants exercisable into 27,037,500 shares of common stock.

Revenue Recognition and Concentration Risk
The Company records revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the prices for the services performed and the collectability of those amounts.

The Company generally recognizes revenue from product sales, including equipment, at the time product is shipped and title passes to the customer assuming all the other revenue recognition criteria stated above are satisfied. Revenues earned on non-refundable licensing fees are generally recognized when the licensing fees are delivered assuming all the other revenue recognition criteria stated above are satisfied. Sales are recorded net of any applicable sales tax.

The Company had product sales revenue of $152,109, $104,900 and $97,472 to three customers, representing approximately 22%, 15% and 14% of total sales for the three months ended September 30, 2011, respectively.

For the three months ended September 30, 2010, the Company had product sales revenue of $209,078 to a single customer. Sales to this customer represented approximately 59% of the Company’s total revenues for that three month period.

Recent Accounting Pronouncements
In May 2011, FASB issued ASU 2011-04 “Fair Value Measurement (Topic 820).”  The amendments in ASU 2011-04 change the wording used to describe the requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. The amendments include (1) those that clarify the Board's intent about the application of existing fair value measurement and disclosure requirements and (2) those that change a particular principle or requirement for measuring fair value or for disclosing information about fair value measurements.  In addition, to improve consistency in application across jurisdictions some changes in wording are necessary to ensure that U.S. GAAP and IFRS fair value measurement and disclosure requirements are described in the same way (for example, using the word shall rather than should to describe the requirements in U.S. GAAP). The amendments that clarify the Board's intent about the application of
 
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
 
existing fair value measurement and disclosure requirements include (a) the application of the highest and best use and valuation premise concepts, (b) measuring the fair value of an instrument classified in a reporting entity's shareholders' equity, and (c) disclosures about fair value measurements that clarify that a reporting entity should disclose quantitative information about the unobservable inputs used in a fair value measurement that is categorized within Level 3 of the fair value hierarchy.  The amendments in this Update that change a particular principle or requirement for measuring fair value or disclosing information about fair value measurements include (a) measuring the fair value of financial instruments that are managed within a portfolio, (b) application of premiums and discounts in a fair value measurement, and (c) additional disclosures about fair value measurements that expand the disclosures about fair value measurements.  The amendments in ASU 2011-04 are to be applied prospectively. For public entities, the amendments are effective during interim and annual periods beginning after December 15, 2011. Early application by public entities is not permitted.  Management does not expect the adoption of ASU 2011-04 to have a material effect on the Company’s financial position, results of operations or cash flows.


3. Inventories

As of September 30, 2011 and June 30, 2011, inventories consisted of the following:
 
   
Sept. 30, 2011
   
June 30, 2011
 
Chemicals
  $ 384,162     $ 328,640  
Lumber
    1,606,960       1,213,738  
    $ 1,991,122     $ 1,542,378  

In addition, inventory is considered finished goods as the Company sells and markets the chemical and treated and untreated lumber.  All of the Company’s inventories are pledged as collateral for borrowings on the Company’s $5,000,000 revolving line of credit (see Note 6).


4. Prepaid Loan Facility Fee

As discussed in Note 6, as consideration for a $5,000,000 revolving line of credit, the Company issued MRL warrants to purchase 50,000,000 common shares at an exercise price of $0.10 per share (the “Warrants”). The Warrants were valued at $3,025,148 on July 26, 2011 and expire on July 26, 2016. The valuation of these warrants was determined using a multi-nominal lattice model using an exercise period of five (5) years and projected volatility of 163%.  The following assumptions were incorporated into the model:  (a) Due to the large number of warrants issued in the money, the dilutive impact of the transaction was modeled; (b) MRL would exercise the warrants as they become exercisable based on volume limitations. Volume limitations were based on 100% of the last 12 months average volume, increasing 1% monthly;  (c) MRL would exercise the warrant at maturity if the stock price was above ten (10) times the exercise price; and (d) Registration of the underlying shares would be effective 180 days following their issuance. The Company has recorded the $3,025,148 value as a prepaid loan fee and is amortizing the value of the warrants to interest expense using the straight line method over the three (3) year availability period of revolving line of credit.
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
 
A total of $181,617 of interest expense was recognized on the amortization of the prepaid loan fees during the three months ended September 30, 2011 with $2,843,531 remaining to be amortized.  At September 30, 2011, a total of $1,008,383 of the prepaid loan facility fee is expected to be amortized in one year, and thus is reflected as a current asset.  The remaining $1,835,148 long-term portion is included in other assets in the accompanying condensed consolidated financial statements.


5. Accrued Liabilities

As of September 30, 2011, the Company owed $403,746 in past due payroll taxes and accrued penalties. The Company has yet to file the necessary payroll tax reports with the impacted taxing authorities. These amounts are recorded within payroll and taxes payable on the accompanying condensed consolidated balance sheet. Also at September 30, 2011, the Company owed $27,701 in past due sales tax in which it has filed the appropriate reports and is making periodic payments.


6. Notes Payable

Revolving Credit and Warrant Purchase Agreement with MRL
On February 14, 2011, the Company entered into a revolving line of credit and warrant purchase agreement with MRL. This agreement did not go into effect until it was ratified by the shareholders of MRL, on July 26, 2011.

Pursuant to the terms of the revolving line of credit and warrant purchase agreement, MRL extended a $5,000,000 revolving loan facility. Interest accrues on the unpaid principal amount of each advance at a rate of 6% per annum.  Under the terms of the revolving line of credit the Company is allowed to borrow in $500,000 increments for a period of three years and is due with accrued interest at 6% per annum three months from the date of borrowing but not later than the expiration date of the agreement of February 14, 2014. So long as no events of defaults exist any loan may be rolled with another loan upon approval by the lender, thus the note and the related accrued interest are reflected as long-term liabilities in the accompanying balance sheet.  The available borrowings under the revolving line of credit can be reduced by the like amount of cash received through the exercise of warrants noted below.  Borrowings on the revolving line of credit are secured by substantially all the assets of the Company.

On July 26, 2011, the Company drew down $3,000,000 on the revolving line of credit.  During the three months ended September 30, 2011, a total of $32,548 of interest expense was accrued on the revolving line of credit and charged to operations.  Additional amounts were borrowed on through the revolving line of credit subsequent to year end, see Note 11.

In consideration for access to borrowings on the revolving line of credit, the Company issued MRL warrants to purchase 50,000,000 common shares at an exercise price of $0.10 per share.  See Note 4 for additional information.  To date none of the Warrants have been exercised.

Loan Payable – Related Party
On July 26, 2011, principal balance and accrued interest of the debt outstanding to MRL as of June 30, 2011 of $1,029,111 was fully paid using the funds received from the $3,000,000 draw down on the Loan Facility discussed above.  During the three months ended September 30, 2011, a total of $6,000 of interest expense was accrued on the prior obligation and charged to operations.

Loan Payable - Other
At September 30, 2011, the Company has a $44,500 liability for advances from a third party.  This third party had other debt and equity transactions with the Company that were settled during the year ended June 30, 2011.  As of the date these financial statements were issued, no terms for repayment have been agreed to between the Company and this third party.
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
 
7. Related-Party Transactions

At June 30, 2011, the Company had a note payable to its Chief Executive Officer, who is also a Director and significant shareholder, with a balance of $174,217, including accrued interest. This note was due on demand and accrued interest at 9% per annum. During the three months ended September 30, 2011 the Company borrowed an additional $166,000 and made principal repayments of $340,217 on this obligation, thus repaying it in full.

At June 30, 2011, the Company had advances payable of $63,163 to the Chief Technical Officer, who is also a director and significant shareholder. Such advances bore no interest and were due on demand. During the three months ended September 30, 2011, the Company made principal repayments of $63,163 on this obligation, thus repaying it in full.

During the three months ended September 30, 2011 the Company made inventory purchases totaling $1,200 from companies controlled by the Company’s President and Chief Executive Officer.
 
During the three months ended September 30, 2011, the Company recorded revenues of $27,050 through sales of their lumber products to an entity owned by the Company’s President and Chief Executive Officer. The Company maintains that the sales were at current pricing. As of September 30, 2011, accounts receivable due from this entity totaled $38.

See Notes 4, 6, 9 and 11 for transactions with MRL, a significant shareholder.

Employment Agreement – President and Chief Executive Officer
Effective April 1, 2011, the Company entered into an employment agreement with its President and Chief Executive Officer for a term of two years, the terms of which are provided in the Company’s most recent Form 10-K filed with the Securities and Exchange Commission (“SEC”).

Accrued compensation due the President at September 30, 2011 totaled $109,627.  Severance pay accrued and charged to operations during the three months ended September 30, 2011 totaled $363.  Compensation charged to operations during the three months ended September 30, 2011 on the granted options totaled $9,460.

During the three months ended September 30, 2011 the Company made repayments of accrued compensation totaling $161,527.  This total included $61,527 paid to the President and $100,000 paid to an entity that he controls.

Employment Agreement – Chief Technical Officer and Director
Effective April 1, 2011, the Company entered into an employment agreement with its Chief Technical Officer and Director for a term of two years, the terms of which are provided in the Company’s most recent Form 10-K filed with SEC.

Accrued compensation due the Chief Technical Officer at September 30, 2011 totaled $188,638.  Severance pay accrued and charged to operations during the three months ended September 30, 2011 totaled $303.  Compensation charged to operations during the three months ended September 30, 2011 on the granted options totaled $4,730.  The Company made repayments of accrued compensation totaling $32,500 to the Chief Technical Officer during the three months ended September 30, 2011.
 
 
8. Fair Value of Assets and Liabilities

Determination of Fair Value
The Company’s financial instruments consist of the line of credit payable – related party, notes payable, and loans payable - other. The Company believes all of the financial instruments’ recorded values approximate their fair values because of their nature and respective durations.
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
The Company complies with the provisions of ASC No. 820-10 (ASC 820-10), “Fair Value Measurements and Disclosures.” ASC 820-10 relates to financial assets and financial liabilities. ASC 820-10 defines fair value, establishes a framework for measuring fair value in accounting principles generally accepted in the United States of America (GAAP), and expands disclosures about fair value measurements. The provisions of this standard apply to other accounting pronouncements that require or permit fair value measurements and are to be applied prospectively with limited exceptions.

ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. ASC 820-10 establishes a fair value hierarchy that distinguishes between (1) market participant assumptions developed based on market data obtained from independent sources (observable inputs) and (2) an entity’s own assumptions, about market participant
assumptions, that are developed based on the best information available in the circumstances (unobservable inputs). The fair value hierarchy consists of three broad levels, which gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3).

The three levels of the fair value hierarchy under ASC 820-10 are described below:

Level 1. Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2. Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly, including quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability (e.g., interest rates); and inputs that are derived principally from or corroborated by observable market data by correlation or other means

Level 3. Inputs that are both significant to the fair value measurement and unobservable. These inputs rely on management's own assumptions about the assumptions that market participants would use in pricing the asset or liability. The unobservable inputs are developed based on the best information available in the circumstances and may include the Company's own data.

Application of Valuation Hierarchy
A financial instrument's categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. The following is a description of the valuation methodology used to measure fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Line of Credit Payable – Related Party. The Company assessed that the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations and the party being unrelated when the transaction was first contemplated and agreed to.

Notes Payable. The Company assessed that the fair value of this liability to approximate its carrying value based on the effective yields of similar obligations.

Loans Payable - Other. The Company assessed that the fair value of this liability approximates its carrying value due to its short-term nature.

The methodology described above may produce a current fair value calculation that may not be indicative of net realizable value or reflective of future fair values. If readily determined market values became available or if actual performance were to vary appreciably from assumptions used, assumptions may need to be adjusted, which could result in material differences from the recorded carrying amounts. The Company believes its method of determining fair value is appropriate and consistent with other market participants. However, the use of different methodologies or different assumptions to value certain financial instruments could result in a different estimate of fair value.
 
As of September 30, 2011, the Company did not have any Level 2 or 3 financial instruments.
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)

9. Stockholders' Deficit

Investment Agreement with MRL
On February 14, 2011, the Company entered into an investment agreement (the “Investment Agreement”) with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL (the “Investment Agreement”).

On February 16, 2011, pursuant to the terms of the Investment Agreement, LTK subscribed for 81,000,000 shares in the Company, representing approximately 45.5 percent of the Company’s resulting total issued and outstanding common equity, for an aggregate consideration of $5,000,000.  The agreement called for LTK to sell the shares to MRL, for the same consideration, subject to approval from shareholders of MRL, which occurred on July 26, 2011.

On February 14, 2011, the Company also entered into a revolving line of credit and warrant purchase agreement with MRL. This agreement did not go into effect until it was ratified by the shareholders of MRL, which occurred on July 26, 2011.  See Notes 4 and 6 for material terms of the revolving line of credit and warrant purchase agreement.

In the event MRL fully exercises the warrants which were granted upon MRL shareholder approval of the revolving line of credit and warrant purchase agreement on July 26, 2011, MRL would acquire an additional 50,000,000 shares.  The acquisition of these additional shares would increase MRL’s holdings to an aggregate of 131,000,000 shares.  Such holdings would constitute approximately 57.3 percent of the resulting total issued and outstanding common equity of the Company, for an aggregate consideration of $10,000,000.

Options
In April 2011, the Company granted options to its President and Chief Executive Officer to purchase 800,000 shares of its common stock and options to its Chief Technical Officer to purchase 400,000 shares of its common stock. The 1,200,000 options have an exercise price of $0.10 per share and expire in five years. The options were valued at $113,520 using the Black-Scholes Option Model with a risk-free interest rate of 2.24%, volatility of 169.83%, and trading price of $0.10 per share. The $113,520 is being charged to operations over their two year vesting period. Compensation charged to operations for the three months ended September 30, 2011 on these options amounted to $14,190. As of September 30, 2011, a total of 300,000 of the 1,200,000 options were vested.


10. Commitments and Contingencies

Purchase, Distribution & Services Agreement #1
On August 24, 2009, the Company entered into a Purchase, Distribution & Services Agreement, (the “Agreement”) with the owner of technical data and intellectual property for a protective coating, in order to obtain an exclusive supply of the product, use of the technical data, intellectual property and other information relating to the product and use of the trademarks, together with certain distribution, marketing and sales rights. Pursuant to the Agreement, the Company has guaranteed it will purchase a minimum of fifty (50) 275 gallon totes of product in the first 12 month period. The Company was required to increase the minimum quantities by 25% in the second year, to 62.5 totes. The initial term of the agreement was two years and will renew for additional one year terms without further action unless terminated.

With regard to the above agreement, the Company learned in fiscal 2010 from third parties that the seller's formula contains a toxic and carcinogenic contaminant known as chlorothalonil. After confronting the manufacturer, it was confirmed the toxin exists in the product and the Company immediately terminated the agreement with cause. The Company’s management does not know how long the toxin has been in the solution. Testing and investigation is ongoing. The seller has provided no information with regards to removing the toxin and is continuing its own investigation of its liabilities.
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)

The Company has not made all of its original purchase commitments under this agreement, due to non-performance by the seller and the existence toxins as described above. Further, the Company had temporarily discontinued selling the product and was pursuing alternative solutions internationally. Management believes that the issue has been isolated to the concentrate form and is not affecting the end user coated product. The Company is currently in the discovery phase of determining the overall impact of this issue, but legal counsel has advised the Company that the seller is responsible for any liabilities generated from the use of the product.

On August 23, 2010, the Company filed a legal action in The Superior Court San Diego, County of San Diego, Case # 37-2010-00058482-CU-MC-NC, against the manufacturer for failure of performance pursuant to the Purchase, Distribution and Services Agreement in the delivery of chemical product and protection of sales territory. A variety of defendants have been added to the case and a variety of claims apply. The case is presently in the discovery phase. The Company is making numerous claims and the Defendants are countering with others centering on a variety of legal claims like breach of contract, fraud, lack of performance, and others.  This case has been sent to arbitration and a portion of the case has been stayed in court. The arbitration panel has been selected and approved.
 
Purchase, Distribution & Services Agreement #2
On July 26, 2009, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Megola, Inc., the owner of technical data and intellectual property for a protective coating in order to obtain an exclusive supply of the product, together with certain distribution, marketing and sales rights. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of four hundred fifty five (455) two hundred and forty five (245) gallon totes of product in the first twelve month period. The Company was required to increase the minimum quantities in the second year, to 842 totes and in the third year to 1,263 totes.

The current agreement expired on November 11, 2010. In December 2010, the Company purchased 37,500 gallons of AF21 at a total price of $303,750. This inventory was used as partial security for the Company’s $570,500 short-term borrowing from Manhattan Resources Limited (see Note 6). As of the date of these financial statements, the Company has no obligation to purchase additional inventory from Megola, Inc.

Purchase, Distribution & Services Agreement #3
On January 18, 2011, the Company entered into an AF21 Product, Purchase, Sales, Distribution & Service Agreement, (the “Agreement”), with Newstar Holding Pte Ltd, a Singapore Corporation, and Randall Hart, an Indonesian National, the inventors and owners of technical data and intellectual property for a protective coating in order to obtain an exclusive supply of the product, together with certain distribution, marketing and sales rights. In addition, a significant shareholder of Newstar Holding Pte Ltd is also a significant shareholder of MRL. The product is a non-toxic non-corrosive fire inhibitor. Pursuant to the Agreement, the Company guaranteed it will purchase a minimum of six hundred fifty (650) two hundred and forty five (245) gallon totes of product in the first two-year period at a cost of $11.40 per gallon, making the total purchase commitment $1,815,450 for the first two years. The Company is required to increase the minimum quantities in the third year to 842 totes at $11.40 per gallon, making the total purchase commitment $2,351,706 for year three. In the fourth year the Company is required to increase the minimum quantities to 1,264 totes at $11.40 per gallon, making the total purchase commitment $3,530,352 for year four. There are no penalty clauses other than cancellation of the agreement if the minimum purchase commitments are not met. If the agreement were to be cancelled it would have a significant impact on the Company's operations until a replacement product could be arranged.

Sales and Inventory Management with Structural Technologies, LLC
During the three months ended September 30, 2011, the Company entered into a Sales and Inventory Management agreement (the “Agreement”), with Structural Technologies, LLC (“Structural”) whereby the Company agreed to land its lumber inventory in a warehouse owned by Structural, and agrees to provide Structural with quality software, technology, an employee for setup and training at a cost to be determined at a later date.  The Company agreed to pay Structural inventory management fees at a rate of $0.25 per square foot per month, plus common area expenses of $0.05 per square foot.  It is estimated that the usage will encompass 15,000 square feet.  Additionally, the Company agreed to pay Structural additional
 
 
 
 
ECO BUILDING PRODUCTS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2011
(Unaudited)
 
 
amounts for rail car loading and unloading (at $600 per rail car) and truck loading and unloading (at $200 per truck load) and agreed that Structural shall be the sole source for the Company’s coating services in Virginia and Maryland.  Structural agreed to purchase standard coating and chemicals from the Company at a cost of $30 per thousand board feet or $9.09 per gallon based upon 3.3 gallons per thousand board feet.  Orders that include changes in pigmentation and antifoaming agents are subject to additional costs.  Lastly, the Company agreed to offer Structural a 3% rebate on purchases of Red Shield coated lumber.  This agreement is expected to have a five-year term, with inventory management fees being waived for the first three months.

Legal Proceedings
The Company has filed a legal action against the company with which it has signed a Purchase, Distribution and Services Agreement, for lack of performance in the delivery of chemical product and protection of sales territory (see Purchase, Distribution & Services Agreement #1, described above).


11. Subsequent Events

Revolving Line of Credit with MRL
For the period from October 1, 2011 through November 14, 2011, the Company drew down $1,500,000 on its revolving line of credit with MRL (see Notes 6 and 7).

Automobile Lease
In October 2011, the Company entered into a 3 year automobile lease with Hoehn Audi, which included a down payment of $5,000 and scheduled payments of $1,018 per month.

 
 
 
 
 
 
 
 
 
 
 
 

 

 


Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

Certain statements concerning our plans and intentions included herein may constitute forward-looking statements. There are a number of factors that may affect our future results, including, but not limited to, (a) our ability to obtain additional funding for operations, (b) the continued availability of management to develop the business plan and (c) successful development and market acceptance of our products.

This annual report may contain both historical facts and forward-looking statements. Any forward-looking statements involve risks and uncertainties, including, but not limited to, those mentioned above. Moreover, future revenue and margin trends cannot be reliably predicted.

Financial Condition and Results of Operations

Results of Operations for the Three Months Ended September 30, 2011 as Compared to the Three Months Ended September 30, 2010

Revenues and Cost of Sales - For the three months ended September 30, 2011 we had total revenues of $690,679 from product sales, as compared to $357,117 in revenues from product and equipment sales for three month period ended September 30, 2010.  Our cost of sales and gross profit for the three months ended September 30, 2011 was $623,604 and $67,075, respectively. This is compared to our cost of sales and gross profit for the three months ended September 30, 2010 of $326,617 and $30,200, respectively. Sales have not yet developed to sufficient levels to improve efficiencies and margins.

Operating Expenses - For the three months ended September 30, 2011, our total operating expenses were $1,439,524 as compared to $569,845 for the three month period ended September 30, 2010. Included in our operating expenses for the three months ended September 30, 2011 were compensation and related costs of $606,454. Professional fees included in our operating expenses for the three months ended September 30, 2011 amounted to $293,190 which included legal fees of $230,239, accounting fees of $59,492, other fees of $3,459. Other significant operating costs we incurred during the three months ended September 30, 2011 included rent of $78,955, consulting fees of $78,556, marketing of $29,953, research and development of $18,621, and other general and administrative costs of $333,795.

Our operating expenses for the three months ended September 30, 2010 consisted of $153,585 of compensation and related costs, $146,724 of professional fees, $142,456 of rent expense, $29,701 of consulting fees, $9,771 of research and development expense, $1,980 of marketing expense, and $85,628 of other general and administrative expenses.

Other Income and Expenses - For the three months ended September 30, 2011 we had other expenses that included interest expense of $220,165 and interest income of $3,365.  Our interest expense for the three months ended September 30, 2011 was inclusive of $181,617 amortization of prepaid loan fees that arose from the issuance of 50,000,000 warrants in July 2011 to a related party as consideration for access to a $5,000,000 revolving line of credit.  This is compared to the three months ended September 30, 2010, in which our other income and expenses included interest expense of $740,325, a $793,694 gain from a change in the fair value of our derivative liabilities, a $377,084 loss on the modification of two of our convertible notes payable, and a $12,546 gain on the settlement of debt from the payment of accounts payable through issuances of our common stock.

Liquidity and Capital Resources
On September 30, 2011, we had $31,352 cash on hand.  During the three months ended September 30, 2011, net cash used in our operating activities amounted to $1,711,368. Net cash used during the same period for our investing activities totaled $66,437.  During the same three month period, net cash provided by our financing activities totaled $1,727,509, of which $3,000,000 was received through borrowings on a line of credit with a related partyand $1,272,491 was paid to related parties as repayments of advances and notes.
 
 
 
 
During the three months ended September 30, 2010, net cash used in our operating activities amounted to $205,219. Cash of $12,874 was provided by investing activities during the same period, which consisted of payments of $73,100 for loans to a related party, and proceeds of $85,974 from repayments of such loans. Cash of $177,827 was used by financing activities during the same period, which consisted of proceeds from related party advances of $139,000, less repayments of debt totaling $316,827.

During the year ended June 30, 2011, we entered into an investment agreement and a revolving line of credit and warrant purchase agreement with Manhattan Resources Limited, a Singapore Corporation (“MRL”) and Dato’ Low Tuck Kwong (“LTK”), a controlling shareholder of MRL. Under the investment agreement, we received $5,000,000 in exchange for issuing 81,000,000 shares of its common stock. Effective July 26, 2011, the we obtained the ability to borrow up to an additional $5,000,000 on the revolving credit and warrant purchase agreement, in exchange for the issuance of warrants to purchase 50,000,000 shares of our common stock at $0.10 per share to MRL as a loan facility fee.  Of this amount $3,000,000 was borrowed in July 2011 and $1,500,000 was borrowed subsequent to September 30, 2011.  As of the date of this filing we had cash on hand of $178,422. We expect the cash on hand plus the $500,000 available to us under the line of credit to fund operations until February 2012.

If current and projected revenue growth does not meet management estimates and proceeds received from MRL are insufficient, we may choose to raise additional capital through debt and/or equity transactions, reduce certain overhead costs through the deferral of salaries and other means, and settle liabilities through negotiation. Currently, we do not have any commitments or assurances for additional capital, other than MRL, nor can we provide assurance that such financing will be available to us on favorable terms, or at all. If, after utilizing the existing sources of capital available to us, further capital needs are identified and we are not successful in obtaining the financing, we may be forced to curtail our existing or planned future operations.

We may continue to incur operating losses over the next twelve months. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in our stage of development. Such risks include, but are not limited to, an evolving and unpredictable business model and the management of growth. To address these risks we must, among other things, obtain a customer base, implement and successfully execute our business and marketing strategy, continue to develop and upgrade technology and products, respond to competitive developments, and attract, retain and motivate qualified personnel. There can be no assurance that we will be successful in addressing such risks, and the failure to do so can have a material adverse effect on our business prospects, financial condition and results of operations.

Critical Accounting Policies

Lines of Credit with Detachable Warrants
Warrants issued to obtain a line of credit are recorded at fair value at contract inception.  When warrants are issued to obtain a line of credit rather than in connection with the issuance, the warrants are accounted for as equity, at the measurement date in accordance with ASC 505-50-25 “Equity-Based Payments to Non-Employees”. The issuance of these warrants is equivalent to the payment of a loan commitment or access fee, and, therefore, the offset is recorded akin to debt issuance costs. The deferred fee is amortized on a straight-line basis over the stated term of the line of credit

Issuances Involving Non-cash Consideration
All issuances of the Company’s stock for non-cash consideration have been assigned a dollar amount equaling the market value of the shares issued on the date the shares were issued for such services.

Stock Based Compensation
The Company accounts for stock options issued to employees and consultants under ASC 718 “Share-Based Payment”. Under ASC 718, share-based compensation cost to employees is measured at the grant date, based on the estimated fair value of the award, and is recognized as expense over the employee's requisite vesting period.

The Company accounts for stock-based compensation to non-employees under ACS Topic 505-50 “Equity-Based Payments to Non-Employees.” This standard defines a fair value based method of accounting for stock-based compensation. In accordance with ACS Topic 505-50, the cost of stock-based compensation is measured at the grant date based on the value of the award and is recognized over the vesting period. The value of the stock-based award is determined using a multi-nominal lattice model or the Black-Scholes option-pricing model, whereby compensation cost is the excess of the fair value of the award as determined by the pricing model at the grant date or other measurement date over the amount that must be paid to acquire the stock. The resulting amount is charged to expense on the straight-line basis over the period in which the Company expects to receive the benefit, which is generally the vesting period.
 
 

 
Revenue Recognition and Concentration Risk
The Company records revenue when the following criteria are met: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. Determination of criteria (3) and (4) are based on management's judgments regarding the fixed nature of the prices for the services performed and the collectability of those amounts.

The Company generally recognizes revenue from product sales, including equipment, at the time product is shipped and title passes to the customer assuming all the other revenue recognition criteria stated above are satisfied. Revenues earned on non-refundable licensing fees are generally recognized when the licensing fees are delivered assuming all the other revenue recognition criteria stated above are satisfied. Sales are recorded net of any applicable sales tax.

Going Concern

Our continuation as a going concern is dependent upon obtaining the additional working capital necessary to sustain our operations. Our future is dependent upon our ability to obtain financing and upon future profitable operations. Management plans to seek additional financing through the sale of its common stock through private placements. There is no assurance that our current operations will be profitable or we will raise sufficient funds to continue operating. The financial statements do not include any adjustments relating to the recoverability and classification of recorded assets, or the amounts of and classification of liabilities that might be necessary in the event we cannot continue in existence.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements or financing activities with special purpose entities.
 
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
 
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
 
Item 4 - Controls and Procedures
 
Evaluation of Disclosure Controls and Procedures
 
As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our principal executive officer and our principal financial officer, of the effectiveness of the design and operation of our disclosure controls and procedures, or “disclosure controls,” pursuant to Exchange Act Rule 13a-15(e). Disclosure controls are controls and procedures designed to reasonably ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the U.S. Securities and Exchange Commission’s rules and forms. Disclosure controls include, without limitation, controls and procedures designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure.  
 
Our management is responsible for establishing and maintaining adequate internal control over financial reporting for the company in accordance with as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles, and (iii) compliance with applicable laws and regulations. Our internal controls framework is based on the criteria set forth in the Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
 
 
 
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
 
Based on that evaluation, our principal executive officer and our principal financial officer has concluded that, as of the end of the period covered by this report, our disclosure controls and procedures are not effective in ensuring that information required to be disclosed in our Exchange Act reports is recorded, processed, and summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms to allow timely decisions regarding required disclosure.
 
During the period ended June 30, 2011 and continuing through the period ended September 30, 2011, we determined that because of the limited personnel, lack of segregation of duties and manual process related to the tracking and valuation of our inventory, management determined that a material weakness existed in the processes, procedures and controls related to the preparation of our financial statements.  This material weakness could result in the reporting of financial information and disclosures in future consolidated annual and interim financial statements that are not in accordance with generally accepted accounting principles.
 
The Company expects to take the following steps to remedy these weaknesses:

 
1.
Implement a new Enterprise Resource Planning system in which will improve the segregation of duties issues and automate the tracking of costs related to inventory
 
2.
Controller to implemented procedures to improve the transaction processing, reconciliation and reporting process of inventory.
 
3.
Formal reviews by Management of the inventory outputs as generated by the Controller.
 
The Company expects to remediate these weaknesses prior to the completion of the quarter ended December 31, 2011.
 
Changes in Internal Controls
 
During the period covered by this report, there was no change in our internal controls over financial reporting or in other factors that materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.
 
 
 
 
 




 
PART II - OTHER INFORMATION
 
Item 1 - Legal Proceedings
 
EcoBlu v. Bluwood USA
 
On August 23, 2010, the Company filed a legal action in The Superior Court San Diego, County of San Diego, Case # 37-2010-00058482-CU-MC-NC, against Bluwood USA, Inc., for failure of perform pursuant to the Purchase, Distribution and Services Agreement in the delivery of chemical product and protection of sales territory. A variety of defendants have been added to the case and a variety of claims apply. The case is presently in the discovery phase. The Company is making numerous claims and the Defendants are countering with others centering on a variety of legal claims like breach of contract, fraud, lack of performance, and others.  This case has been sent to arbitration and a portion of the case has been stayed in court. The Company is seeking relief in the amount of approximately $20,000,000 and other relief.  The arbitration panel has been selected and approved.
 
From time to time the Company may be named in claims arising in the ordinary course of business. Currently, no legal proceedings or claims, other than those disclosed above, are pending against or involve the Company that, in the opinion of management, could reasonably be expected to have a material adverse effect on its business and financial condition.
 
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
 
None.
 
Item 3 - Defaults Upon Senior Securities
 
None.
 
Item 4 - [Removed and Reserved]
 
 
Item 5 - Other Information
 
None.
 
 
 
 
 

 
 
 
Item 6 - Exhibits and Reports
 
Exhibits
 
Eco Building Products, Inc. includes by reference the following exhibits:
 
3.1
Articles of Incorporation, filed as exhibit 3.1.1 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.
3.2
Bylaws, filed as exhibit 3.2 with the registrant’s Registration Statement on Form SB-2, as amended; filed with the Securities and Exchange Commission on August 23, 2007.
3.3
Amended  Articles of Incorporation ; filed as exhibit 3.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on October 22, 2009
3.4
Amended  Articles of Incorporation ; filed as exhibit 3.3 with the registrant’s Annual Report on Form 10-K; filed with the Securities and Exchange Commission on September 28, 2011
4.1
Convertible Promissory Note, dated December 22, 2009; filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2010
4.2
Convertible Promissory Note, dated February 11, 2010; filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2010
10.1
Investment Agreement – between Ecoblu Products, Inc.,  Manhattan Resources Limited and Dato’ Low Tuck Kwong , dated February 14, 2009, filed as exhibit 10.1 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.
10.2
Revolving Credit and Warrant Agreement – between Ecoblu Products, Inc. and Manhattan Resources Limited, dated February 14, 2009, filed as exhibit 10.2 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.
10.3
Warrant Termination Agreement – between Ecoblu Products, Inc. and SLM Holding PTE, Ltd., dated January 12, 2011; filed as exhibit 10.3 with the registrant’s Current Report on Form 8-K; filed with the Securities and Exchange Commission on February 16, 2011.
10.4
Hartindo AF21 Product, Purchase, Sales,  Distribution & Service Agreement, between Ecoblu Products, Inc. and Newstar Holdings Pte Ltd, dated January 18, 2011; filed as exhibit 10.8 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on February 22, 2011.
10.5
Employment Agreement – between Ecoblu Products, Inc. and Steve Conboy, Effective April 1, 2011. filed as exhibit 10.5 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on May 23, 2011.
10.6
Employment Agreement – between Ecoblu Products, Inc. and Mark Vuozzo, Effective April 1, 2011 filed as exhibit 10.6 with the registrant’s Current Report on Form 10-Q; filed with the Securities and Exchange Commission on May 23, 2011.
 
Eco Building Products, Inc. includes herewith the following exhibits:
 
 
 
 

 


 
 
SIGNATURES
 
In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
  Eco Building Products, Inc.  
       
Date: November 14, 2011   
By:
/s/ Steve Conboy  
    Steve Conboy, President  
    Principal Executive Officer  
    Principal Financial Officer  
 
 
 
 
 
 
 
 
 
 

 
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